Alistair Darling in £50bn gamble to aid banks

Alistair Darling will unveil an unprecedented scheme to offer £50 billion in taxpayer-backed loans to high street mortgage lenders today in an attempt to solve the credit crisis.

The Chancellor hopes that the cash injection – the biggest ever by the Bank of England – will lead to cheaper mortgage deals and stop the housing market slipping further.

Since the global credit crisis began last summer, banks have become wary about lending to one another

Under the controversial scheme, the Bank will loan money to banks and building societies in return for potentially risky mortgage debts. If the housing market fell and borrowers defaulted on their mortgages, taxpayers could be left nursing losses.

The total size of the loans is expected to be £50 billion but officials said they were prepared to lend more, prompting fears that the taxpayers’ exposure may rise.

Ministers believe the scheme is essential and will allow lenders to offer more competitive deals for borrowers. Gordon Brown has been closely involved in drawing up the package.

The loans are intended as a short-term measure lasting for up to three years and government sources say the banks “have to guarantee the money is returned”.

The scale of the bailout alarmed some opposition MPs and comes just months after the nationalisation of Northern Rock, which exposed the taxpayer to as much as £100 billion in liabilities.

Vince Cable, the Liberal Democrat Treasury spokesman, said: “It is necessary for action to be taken to unblock the mortgage market and to break the crippling effects of the credit crunch.

“However, we cannot have a situation where the banks are able to privatise their profits and nationalise their losses. Since the mortgages from the banks are of inferior quality and higher risk than the government bonds, the implication must be that taxpayers are shouldering the risks and losses of the banks. This cannot be right.”

The Conservatives support the proposal in principle but George Osborne, the shadow chancellor, said: “Unblocking the financial system and getting the Bank of England to do this swap, where it is basically taking on some mortgages in return for the equivalent of cash from the bonds, is a good idea but we have got to make sure the taxpayer is protected.”

Under the plans, to be unveiled this morning, the Bank of England will swap Treasury bills for mortgage debts and other collateral from the banks. The total size of the loans will be dictated by demand.

Since the global credit crisis began last summer, banks have become wary about lending to one another and have called on the Bank of England to provide large amounts of extra money in the form of Government loans.

Previously, the Bank has agreed to lend money only in return for high-quality assets such as Government gilts. However, it has extended the collateral it will accept for the scheme to mortgages and even credit card debts.

Mr Darling will make a statement to Parliament this afternoon and will meet the country’s main mortgage lenders tomorrow, when he is expected to urge them to build on the Government’s intervention.

He will discuss the possibility of people at risk of defaulting being offered “mortgage holidays” or flexible mortgages allowing them to underpay for a few months before compensating with higher payments when conditions improve.

In an interview with the BBC yesterday, Mr Darling said the economic turmoil had created an “unprecedented shock to the system”.

“What it [the scheme] will do is effectively lend banks money to un-freeze the situation,” he said.

“We are trying to un-bung that situation so that the Bank will be making money available to the British banking system. It’s got to be repaid, and we will take securities in return for it.

“The idea is that it will open up the market and begin the process of opening up the mortgage market, which will help householders. We believe that this will be an essential step in trying to get the financial market stabilised.”

Last week, it emerged that Royal Bank of Scotland, Britain’s second biggest lender, would seek to raise up to £12 billion from its shareholders in a “rights issue”. Mr Darling indicated that he expected to see “much, much more of that”.

He said he wanted banks to “pass on the benefits of the three interest rate cuts” following criticism that the costs of mortgages had risen despite reductions in the base rate.

The loans to be unveiled today, which will have interest attached to them, will be repayable in a year, although the arrangement can be rolled over for up to three years. There will be a “haircut” between the value of the government loan and the value of the mortgages offered in return. For example, the Bank may offer £1 in taxpayer-backed loans for every 80p or 90p in mortgage debt. The gap will vary depending on the perceived quality of the mortgages being offered. Banks would have to put up greater amounts for credit card and sub-prime mortgage debt.

Research published today by the Ernst and Young Item Club, the economic forecasting group, predicts that house prices will fall by 10 per cent and the number of people moving home will fall by 40 per cent in the next two years.

Another study found that asking prices for properties fell in two-thirds of England and Wales in the past month.

The average asking price fell by just 0.1 per cent to £239,521 but this figure disguised severe price cuts in some parts of the country, according to Rightmove, the property website.

In Bedfordshire, for instance, sellers had to knock off £7,529 on average and those in Essex chopped £8,289 from their asking price.

The falls are significant as it is the first time since Rightmove started its survey six years ago that it recorded a fall in April – a month that usually heralded the start of the house-selling season.